Q2 GDP could be worse PDF Print E-mail
Tuesday, 15 October 2019 04:05
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Shobhana edit 

Given the sluggish loan growth, contracting four-wheeler sales and slowing volume momentum in a host of other sectors, it is not altogether surprising that factory output contracted by 1.1% year-on-year (y-o-y) in August. The deterioration was particularly marked in segments such as capital goods, which shrank 21% y-o-y on the back of a 7.2% y-o-y fall in July, and durables, which fell 9.1% y-o-y, reflecting the very anaemic demand partly arising from weak credit flows to many sectors of the economy. As has been pointed out, despite excess liquidity to the tune of `200,000 crore in the banking system—the system has been in a surplus for close to five months now—banks are being ultra-cautious while sanctioning loans. They are not to be blamed.

For one, much of corporate India is still fairly leveraged, and in the current difficult environment, cash flows aren’t improving. Moreover, the quality of corporate balance sheets remains worrying as seen from the daily downgrades by ratings agencies. Indeed, the second NPA cycle has started, and could get exacerbated by weakening commodity cycles, the global slowdown, and also the unhelpful policies relating to the ownership and operatorship of infrastructure assets; as experts have pointed out the IRRs for some infra projects are unremunerative given that prices are below market levels. The fact that state governments have been dishonouring contracts—as has happened with some renewable energy projects—will also hurt banks’ portfolios.

The offtake of loans by individuals, too, is slowing because incomes are growing slowly and consumer confidence is low. It is precisely because companies don’t see the need to produce when demand isn’t picking up that manufacturing is contracting—the August data of a negative 1.2% was the worst in five years. It is hard to see greenfield investments by the private sector picking up meaningfully in the next couple of years, and, as a share of GDP, it could actually fall. That is because capacity utilisation is around 73%, and distressed assets are being bought at attractive valuations via the IBC route. Very few new projects are being announced.

However, existing projects that are stressed or stalled—like in the residential real estate sector—can be revived with relatively small incremental investments. That could then help fuel demand for a range of products and, at the same time, help banks recover their loans. Over a period of time, household savings should move up, and can be used to fund investments.Unless some sectors get an immediate boost, it is hard to see the economy re-bounding. With high frequency data at their lowest levels since 2008, growth in Q2FY20 could well be lower than the 5% y-o-y clocked in Q1FY20. That, then, increases the risk of the economy growing at below 6% in 2019-20.



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